Corporate Tax Dodging In the Fifty States

,
2008–2010
December 2011

About ITEP
Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington,
DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax
policies on tax fairness, government budgets, and sound economic policy. Among its many publications on state and local tax policy are Who Pays?
A Distributional Analysis of the Tax Systems in All 50 States and The ITEP Guide to Fair State and Local Taxes. ITEP’s full body of research is available
at www.itepnet.org.

About CTJ
Founded in 1979, Citizens for Tax Justice (CTJ) is a 501 (c)(4) public interest research and advocacy organization, based in Washington DC,
focusing on federal, state and local tax policies and their impact upon our nation. CTJ staff hold briefings with lawmakers, testify before legislative
committees, and explain their work and the implications of tax policy issues directly to policymakers and policy advocates across the nation. CTJ’s
full body of work can be found here: www.ctj.org.
www.itepnet.org t www.ctj.org
1616 P Street, NW Suite 200 s Washington, DC 20036 s Tel: 202-299-1066 s Fax: 202-299-1065

Introduction
In October, South Carolina Governor Nikki Haley suggested
that gradually repealing the state’s corporate income tax should
be a priority for lawmakers in 2012. Haley’s idea was alarming,
but hardly surprising: in the past year, governors in Arizona and
Florida have proposed similar plans, and lawmakers in a number
of other states have moved to enact expensive new corporate
tax breaks or reduce the corporate tax rate. Noticeably absent
from the policy debates in these states, however, has been any
discussion of whether businesses in each of these states are
currently paying the corporate income tax to begin with.

• 68 of the 265 companies managed to pay no state income tax at
all in at least one year from 2008 through 2010, despite telling
their shareholders they made almost$117 billion in pretax U.S.
profits in those no-tax years. 16 of these companies enjoyed
multiple no-tax years.

This report uses data from the annual financial reports filed by
some of the biggest and most profitable Fortune 500 corporations
to shed light on this question—and to identify strategies for
ensuring that state corporate income taxes will continue to play
an important role in state tax systems going forward.

• In 2009 alone, 32 companies paid no state income tax. Another
105 of the companies paid less than half the weighted-average
statutory state corporate tax rate that year, meaning that fully
one half of the companies in our sample paid less than half the
average state tax rate.

A November 2011 study by Citizens for Tax Justice and the
Institute on Taxation and Economic Policy, Corporate Taxpayers
and Corporate Tax Dodgers, showed that at the federal level, many
profitable Fortune 500 corporations have been able to sharply
reduce their corporate income tax bills, often reducing them
to zero—or less—in years when they were quite profitable.
Since then, we’ve taken a hard look at what many of these same
corporations paid in state income taxes nationwide over those
three years, which we report here.

• Perhaps most striking, if these 265 corporations had paid the
6.2 percent average state corporate tax rate on the$1.33 trillion
in U.S. profits that they reported to their shareholders, they
would have paid $82.6 billion in state corporate income taxes
over the 2008-10 period. Instead, they paid only $39.9 billion.
Thus, these 265 companies avoided a total of $42.7 billion in
state corporate income taxes over the three years.

Of the 280 profitable Fortune 500 corporations included in our
November federal study, 265 fully disclosed their state and local
income tax payments.1 Here are some of the key facts that these
companies’ annual reports reveal:
• Between 2008 and 2010, these 265 companies paid state
income taxes equal to only 3.0 percent of their U.S. profits.
Since the average statutory state corporate tax rate is about 6.2
percent (weighted by gross state product), that means that over
this period, fully half of their profits escaped state taxes entirely.
1

• Some companies, such as DuPont, Goodrich, International
Paper and Intel, paid no net state income tax over the full threeyear period.

The companies in our survey operate all over the country. But
they don’t disclose their profits and taxes on a state-by-state
basis—so the findings of this report don’t tell us conclusively
whether specific companies paid any income tax in specific
states. Tables at the end of this report sort the tax data for all 265
companies not only alphabetically and by tax rates, but also by the
location of each company’s headquarters. On the next page, we
give details about the 68 firms that paid no state income tax in at
least one year from 2008 through 2010.

a state contemplating some kind of new corporate tax break, either as
an across-the-board entitlement for all corporations or to attract a high
priority target.

As recently as 1986, state corporate income taxes equaled 0.5 percent
of nationwide Gross State Product (a measure of nationwide economic
activity). But in fiscal year 2010, state and local corporate income taxes
were just 0.28 percent of nationwide GSP, equaling the low-water mark
set in 2002. For the three years between fiscal 2009 and 2011, in fact,
state corporate income taxes were at their lowest sustained level, as a
share of the U.S. economy, since World War Two.

In the past two decades, business lobbyists have prioritized one particular
tax break, the “single sales factor,” in their state tax lobbying efforts. The
single sales factor is an arcane, but vital change in the formula that states
use to divide the profits of multistate corporations among themselves
for tax purposes.2 Historically, many states taxed multistate businesses
using a “three factor” formula that took into account the proportion of
a company’s property, payroll and sales that were made in each state.

This long-term decline in the state corporate income tax has three broad
causes: the trickle-down impact of federal corporate tax cuts, ill-advised
tax “incentives” intentionally enacted by state lawmakers, and unintended
tax shelters created by companies armed with creative accounting staffs.
earned income such as salaries and wages.

Linkage to federal tax laws means a steady stream of
federally-imposed tax cuts
States levying a corporate income tax generally use federal income

But in the name of economic development, these corporations are
now pressuring states to tax them only in proportion to the sales they
make in a state. Among the problems with this approach, however, is
the fact that federal law says that merely making sales into a state doesn’t
necessarily make a corporation taxable. So if a state adopts the sales-only
formula, then a resident corporation whose sales are entirely out of state
won’t pay anything to its home state, and it may not be taxable in any of
its customers’ states, either. This could lead to no corporate income tax
liability to any state—what is often called “100 percent nowhere income.”

definitions as a starting point in calculating their own corporate tax base,
so that the first line on state corporate tax forms is typically “taxable
income” as previously calculated on federal tax forms. This makes state
tax compliance and enforcement easier—but also means that in many
states, every new corporate loophole that gets tucked into the federal code
will also erode the state tax base. Even if these federal tax breaks, many
of which are ostensibly designed to encourage business investment, are
having an effect nationally, it makes little sense for any state to piggyback
on a tax cut that could encourage investment anywhere in the United
States.

The single sales factor is a classic example of the “race to the bottom” in
state corporate tax policy. When only a few states offered this giveaway, it
may have helped to convince some companies to relocate or expand. But
when a majority of states have abandoned the traditional “three-factor”
formula in favor of heavily weighting sales, it’s likely that companies will
be rewarded with tax cuts no matter where they invest—which means
that this incentive has no incentive effect at all in any particular state. As
Appendix A shows, all but eight of the states with corporate income taxes
have increased the weight of their sales factor. Under these circumstances,
the only winners from the single sales factor are the companies that are

Fortunately, every state has the option of “decoupling” from specific

able to pay less in taxes.3

federal corporate giveaways—and many have chosen to disallow some
of the costly tax deductions enacted by Congress in the last decade.
But dozens of states have seen their tax bases shrink due to federal base
narrowing measures, often simply because they cannot marshal the
legislative votes to decouple in a timely way.

State tax “incentives”
State elected officials often find it difficult to resist entreaties from
corporations for tax breaks justified on the dubious grounds that they
will stimulate “economic development.” Hardly a week goes by without

More than half the states continue to offer investment tax credits against
their corporate tax more than thirty years after the federal government
abandoned its investment credit because Congress and President
Reagan concluded that it was ineffective in stimulating investment.
2

See Michael Mazerov, The “Single Sales Factor” Formula for State Corporate Taxes: A Boon to Economic Development or a Costly Giveaway?, Center
on Budget and Policy Priorities, revised Sept. 2005.
3
This trend did not stop lawmakers in Alabama, California and South
Carolina from increasing their sales factors in recent legislative sessions,
however.

Page 3

According to a study by University of Iowa economist Peter Fisher,

pay royalties to this subsidiary for the right to display the trademarks.

the effective corporate tax rate on manufacturing companies in the

These royalties are tax-deductible (as a cost of doing business) and hence

20 states he studied fell by 30 percent between 1990 and 1998 alone.

can be used to largely or entirely eliminate corporate income tax liability

Tax incentives, most of them corporate tax credits, offset 30 percent of

in the states in which the corporation is actually operating stores and

corporate tax liability in these states in 1998—up from 10 percent in

earning its profits. Meanwhile, the royalty payments are not taxed by the

1990.4 State corporate tax credits for everything from providing child

tax-haven state.5

care to employees, to conducting product research and development, to
cleaning up polluted “brownfields” continue to proliferate.

Asset-Transfer Shelters:
A second tax-avoidance strategy exploiting state corporate income taxes

In the short run, it may be too much to ask for states to stop offering

that treat parents and subsidiaries as separate taxpaying entities involves

company-specific tax breaks. But as the work of the nonprofit watchdog

spinning off income generating assets into subsidiaries in tax haven states.

group Good Jobs First has documented, states can at least adopt

This technique has recently received a lot of attention in Wisconsin.6

corporate income tax. The IRS, with all of its tax lawyers and economists,

deduction was enacted in October of 2004 to compensate manufacturers

has had a poor track record in proving that multinational corporations’

for the loss of an unjustified and illegal (under World Trade Organization

international transfer prices are resulting in an abusive shifting of income

law) export subsidy. It is bad enough that Congress decided to hold

beyond U.S. borders. State revenue officials are well aware of this, and

manufacturers harmless for the loss of a tax break they didn’t need or

some make no more than a token effort to police interstate transfer

deserve to begin with. But more than half of the states with corporate

prices—opening the door to significant revenue losses.

income taxes have compounded this error by conforming to a tax
break that in no way is tied to the creation of manufacturing jobs in any

Potential Paths to State Corporate Tax
Reform
Some people have looked at the wide variety of corporate state-taxavoidance strategies and concluded that the state corporate income
tax is beyond repair. But the truth is that states have lots of tools in their
arsenals to revitalize this still-important—and progressive—source of
revenue. Appendix A provides a state-by-state matrix showing which of
these options are currently available to each state. Here are some of the
most promising possibilities:

Decoupling from federal tax giveaways
The focal point of state “decoupling” efforts has been the so-called
“bonus depreciation” measures enacted by Congress in 2002, 2003,
2004, 2008, 2009 and 2010. These measures generally allow companies
to deduct the cost of investments in machinery and equipment faster
than they would otherwise be able to. When President George W. Bush
pushed through a 2002 plan to allow companies to immediately write
off 30 percent of the cost of eligible investments in the first year, more
than 30 states decoupled from this measure by requiring companies to

particular state. 22 states are now losing substantial amounts of corporate
tax revenue due to this misguided federal tax break.7
The QPAI deduction is one major factor reducing state corporate tax
rates over the past three years—but its effect on state revenues in the
future will likely be worse. This is because the deduction only took full
effect at the beginning of 2010: from 2004 to 2006, the deduction was
equal to 3 percent of qualifying income, increasing to 6 percent in 2007
and its permanent 9 percent rate at the beginning of 2010. This means
that the full effect of this tax break on states was only felt for one of the
three years studied in this report.
A third type of federal tax break that has a pass-through effect on states
is the “net operating loss carryback” provision, which allows companies
to use current-year income losses to offset income from earlier years.
While virtually every state allows companies to carry losses forward,
also following federal rules, many states have decoupled from the federal
provision that allows companies to rewrite history by carrying their
losses back two years. Seventeen states, however, have not done so, and
face continued revenue losses from their inaction on this tax break.8

add back the bonus depreciation deduction to their taxable income.
Similar numbers of states have decoupled from the more generous 50
percent bonus depreciation measures pushed through by President Bush
in 2008 and extended by President Barack Obama in 2009 and 2010, but
fifteen states are currently losing corporate income tax revenue due to the
currently-effective bonus depreciation law. In 2011, the impact of bonus
depreciation will likely be even larger than in 2010 for affected states, since
President Obama’s most recent extension of bonus depreciation allowed
companies to write off 100 percent of eligible investments during 2011.
The President’s proposed “jobs bill” would extend this lucrative tax break
through the end of 2012.
States have been less successful in decoupling from the so-called
deduction for “qualified production activities income (QPAI).” This

Of course, if recent rumblings about federal corporate tax reform develop
into viable legislation, decoupling from at least some of these federal
tax breaks may become a moot point: if federal law no longer allows
these tax breaks, then neither will the states. Unfortunately, all current
indicators are that Congress plans to continue on its path of offering
more and more corporate tax breaks, and the Obama administration
has shown little interest in reversing this trend. If this worrisome trend
continues, states should consider much broader decoupling from the
federal corporate tax. California is an example of a state that has rejected
7

See Institute on Taxation and Economic Policy, “The QPAI Corporate
Tax Break: How it Works and How States can Respond,” 2011.
8
See Michael Mazerov, “Minority of States Still Granting Net Operating Loss ‘Carryback’ Deductions Should Eliminate Them Now,” Center on
Budget and Policy Priorities, May 11, 2009.

Page 5

a wide array of federal loopholes, and instead insists on rules that more

“Nowhere Income”

fairly measure corporations’ actual profits.

Another key reform is a rule implemented by about half the corporate
income tax states that eliminates “nowhere income” arising from the

Apart from decoupling their corporate income taxes from unwise federal

mismatch between the laws that establish when a corporation has

corporate tax provisions, there are many other useful steps states can take

crossed the taxability or “nexus” threshold in a state and the rules that

on their own to revitalize their corporate income taxes.

divide a corporation’s profit for tax purposes among the states. As noted
above, federal law prevents a state from automatically being allowed to

Combined Reporting

tax any corporation that makes sales to its residents. At the same time,

The single most important corporate tax reform available to states is to

the income-division rules always take sales into account to some extent

adopt a practice used by 23 states called “combined reporting,” which

in assigning income for tax purposes—meaning that income can be

effectively treats a parent and its subsidiaries as one corporation for state

assigned to states that don’t have the authority to tax it. “Nowhere

tax purposes. Combined reporting eliminates most of the tax benefits

income” can be eliminated by a so-called “throw-back rule” that effectively

of shifting profits into Delaware or Nevada by adding them back to the

assigns any corporate profit that cannot be taxed in the states where a

profits of the corporation that is taxable in the state and then taxing a

corporation’s customers are located back to the state(s) where the goods

9

share of the combined profit. As the visibility of corporate “income

are produced. About half the states lack this rule at present.10

shifting” scams has increased in recent years, support for this reform
has grown nationwide: since 2004 alone, seven states have enacted

Alternative Corporate Taxes

combined reporting. And the pace of legislative activity is not slowing:

States can consider adopting some form of alternative minimum tax to

in 2011, bills were introduced in Alabama, Arkansas, Connecticut,

ensure that corporations pay some tax no matter how many loopholes

Maryland, Missouri, New Mexico, Rhode Island and Tennessee to

they are able to take advantage of. A number of states piggyback on the

require mandatory combined reporting in these states.

federal corporate AMT, but this has become much less useful because the
federal AMT has been seriously watered-down over time by Congress.

It is likely that the spread of combined reporting has helped to keep the

States could consider rejuvenating the older federal AMT rules as an

state income tax from experiencing a much more serious decline, and

alternative, less loophole-prone tax regime. If this seems too complicated,

it is a tremendous accomplishment that more than half of the states

states could also consider using the pretax profits that companies report

with broad-based corporate income taxes now require combined

to their shareholders as the basis for an alternative tax. Since companies

reporting. Yet every one of the combined-reporting states could make

are usually reluctant to tell their shareholders they aren’t making healthy

their reporting regime even more leakproof by adopting “worldwide”

profits, this approach provides a built-in check against corporate tax

combined reporting. Combined reporting is usually limited to the

avoidance. Corporations are required to show their profits reported to

“water’s edge”—that is, to U.S. based parents and subsidiaries. About a

shareholders on their federal tax returns, and this could prove helpful to

half-dozen states, most notably California, have adopted worldwide

states in obtaining the necessary data.

combined reporting, but each of these states allow companies to elect to
use water’s edge rules—which any company engaged in international tax

A second-best approach to alternative corporate taxes is a flat-dollar

avoidance would presumably choose to do. Several states, most recently

minimum tax, which half a dozen states currently require. These taxes

Montana, have taken a valuable half-step toward worldwide combined

can act as a vital backstop to ensure that large corporations have some

reporting by including in the combined report subsidiaries set up in a

“skin in the game”— although these flat-dollar taxes are often set

number of foreign tax havens—eliminating the state corporate income

perilously close to zero. For example, a 2009 report from the Oregon

tax benefits of artificially shifting income into those countries. Most of

Center for Public Policy found that more than 5,000 profitable

the other states with combined reporting could productively enact a

corporations operating in Oregon had paid no income taxes in 2006

similar change.
9

See Michael Mazerov, “A Majority of States have Now Adopted A Key
Corporate Tax Reform—Combined Reporting,” Center on Budget and
Policy Priorities, April 3, 2009.

10

See Michael Mazerov, “Closing Three Common Corporate Income Tax
Loopholes Could Raise Additional Revenue for Many States,” Center on Budget and Policy Priorities, Revised May 21, 2003.

Page 6

beyond the state’s $10 minimum tax.11 (While Oregon lawmakers have

digging. States need to stop giving away corporate taxes in the name of

not responded to this finding by eliminating corporate tax loopholes,

economic development. Chasing after businesses by fighting over who

they did subsequently increase the minimum tax for large corporations

can give the largest tax concessions is a zero-sum game. States should

substantially.) Flat-dollar minimum taxes are typically between $100

get together and agree to stop this futile, destructive competition. They

(as is the case in Utah) and $250 (Vermont). Appendix A shows the

should sunset ineffective tax credits and enter into pacts with each other

states that have not yet adopted a meaningful corporate minimum tax.

not to use tax giveaways to compete for jobs. A good place to start would

A majority of states now offer something resembling a circuit breaker

be to renounce the single-sales factor interstate income division formula

to older adults, but relatively few have allowed the credit to non-elderly

that threatens to eviscerate what is left of the state corporate tax and

homeowners—despite the fact that low-income non-elderly families

renegotiate a balanced formula that all states can follow.

can feel the pinch from high property taxes just as much as older adults.

Enacting an Income Tax
Six states currently do not levy a broad-based corporate income tax at all.
Three of these (Ohio, Texas and Washington) have chosen to levy a tax
that falls primarily on a company’s gross receipts in lieu of a corporate
income tax, usually on the theory that such a tax will be less volatile
than a tax on profits. The other three states (Nevada, South Dakota
and Wyoming) have neither a broad profits tax nor a meaningful gross
receipts tax, although South Dakota does tax the income of certain
financial corporations.

Corporate Tax Disclosure: A Vital First Step
Toward Corporate Tax Fairness
While closing the corporate tax loopholes described above should be
the immediate goal of any state policymakers who seek a sustainable
corporate income tax, wishing cannot make it so. An important first
step toward achieving these reforms is to build awareness among
policymakers of the need for loophole-closing measures. Unfortunately,
the deck is stacked against those who would create a more level playing
field for business taxation at the state level, because typically no one—
from lawmakers to the media to the general public—knows how their

Michigan Joins the Income Tax Club

corporate tax system actually works. The vast majority of states now
require “tax expenditure reports,” which provide a complete list of the

Earlier this year, Michigan lawmakers enacted a new
corporate income tax, ending several tumultuous
decades of reliance on a series of taxes based primarily
on gross receipts. The enduring unpopularity of the
state’s various receipts-based taxes is an important
reminder of why a corporate income tax is used in so
many states: when properly designed, it falls only on
those corporations that can afford to pay it.

corporate tax breaks allowed under state law along with an annual cost

Meanwhile, at least one other state that has recently
repealed its income taxes in favor of a broad-based tax
on gross receipts, Texas, has found that neither the
revenue yield nor the popularity of their new tax have
lived up to expectations.

nationwide does not tell us whether they paid—or did not pay—the tax

estimate for each tax provision. (Amazingly, more than half a dozen
states don’t provide even this basic information; these states are listed in
Appendix A.) But virtually none of the states provide company-specific
information on corporate tax breaks.
This harsh reality affects the implications of this report as well: our
finding that many companies are paying zero or less in state income taxes
in any specific state. This is because the annual financial reports that all
publicly traded companies must file with the Securities and Exchange
Commission (SEC) each year include information on the total amount
of state corporate income taxes paid by each company in a given year, but
do not provide similar numbers for each state in which the companies

Stop Providing Foolish State Corporate Tax Subsidies

do business.

When you find yourself in a hole, the first thing you need to do is stop
11

“New Data Show Thousands of Profitable Corporations Pay No Oregon
Income Taxes Except the $10 Minimum,” Oregon Center for Public Policy,
February 23, 2009.

For this reason, a vital starting point for state corporate tax reform is a
procedural move: states need to require corporations to disclose publicly,
on a state-by-state basis, the amount of corporate income tax they pay

Page 7

like the present one can show that there’s a serious problem with the state
corporate tax on a national basis. However, without some clearer sense of
the specific states in which tax payments are low—or nonexistent—and
whether the low payments are due to “nexus” thresholds, income-division
rules, the definition of taxable profits, and/or tax credits, policymakers
cannot readily identify what they can do to rectify the situation, or even
how serious the problems of their particular state’s corporate tax are.
Sensible goals for corporate tax disclosure efforts include:
• Identifying all the substantial tax deductions, exemptions and credits
claimed by each large corporation in a state.
• Evaluating the net impact of these tax breaks on the bottom-line
income tax payments of each corporation.
• Assessing the effectiveness of these tax breaks in creating jobs and
growing the state’s economy.
While the measures listed above can help identify prominent “zero-tax”
corporations, they are insufficient to whether corporations are paying
their “fair share” of corporate taxes. Only disclosure of a company’s
in-state profits can allow an accurate analysis of whether specific
companies are paying anywhere close to the statutory tax rate in their
state.
Efforts to publicly “name names” of corporate tax avoiders, or even to
publish statistics showing the aggregate number of profitable companies
avoiding tax liability, have played a key role in encouraging meaningful
loophole-closing reforms. A series of reports from CTJ and ITEP in
the mid-1980s are widely understood to have lit a fire underneath
Congressional efforts to eliminate corporate tax giveaways, and efforts
by tax administrators in Maryland and New Jersey have helped to build
support for sensible reforms in those states in recent years.
The policy path to a more sustainable state corporate income tax is
clear. But absent detailed information about the extent of corporate
tax avoidance and the effectiveness of the tax breaks lawmakers have
chosen to allow, policymakers will likely never see corporate tax reform
as a goal worth pursuing. Disclosure of company-specific tax breaks can

Economic Nexus: A Sensible Standard
for Defining Corporate Taxability
Even as some corporate lobbyists are encouraging
Congress to adopt a “physical presence” standard that
would sharply curtail the ability of states to tax at least
some of the income of multi-state corporations, a number
of states are taking aggressive—but sensible—steps to
tax some of the income of companies that clearly benefit
from using their infrastructure to sell into a state, yet
don’t satisfy the “physical presence” standard because
they don’t have have property or employees based in the
state. The common-sense observation behind this
alternative “economic presence” standard is that in the
Internet age, multi-state companies can routinely do
millions of dollars in business in a given state without
ever setting foot there —and that there needs to be a way
to define the threshold level of business activity above
which these companies should be taxed by each state.
Economic nexus has been upheld by a number of courts.
Most recently, the U.S. Supreme Court declined to
consider overturning a decision by the Iowa Supreme
Court that allowed the state of Iowa to tax fast-food giant
KFC, which avoids having a traditional “physical
presence” in Iowa by leasing its secret recipe (and logo)
to independent franchisees based in the state. This series
of court decisions clearly indicates that many states could
(and should) do more to prevent companies like KFC
from using the physical presence standard to avoid
paying their fair share of state corporate income taxes.
While almost every state asserts nexus over at least some
corporations based on economic activities (with
California, Colorado, Connecticut, New Hampshire,
Oregon and Wisconsin each adopting an economic
nexus standard in the last five years), virtually none of the
states have fully exercised this ability.

help lawmakers to see the light.

Page 8

Congressional Actions Threaten to Further
Weaken the Corporate Tax
Tax breaks enacted by the federal government are at least partly to blame
for the long, slow decline of the state corporate income tax— and
Congress has shown remarkably little interest in minimizing the damage
its enacted tax breaks do to state finances.

Under H.R. 1439, the state would also be able to tax a business if the
employee was only sent into the state for 14 days each year, or if the
company created several subsidiaries that each hired the employee and
sent him or her into the state for 14 days each year. Even warehousing
items in a state before shipping them to customers could easily be done
in a way that avoided the “physical presence” standard, if a company hired
a second company to warehouse the goods before shipping them to instate customers.

From this perspective, the good news is that in 2011 Congress has
engaged in a serious debate over how federal laws should affect state
corporate taxes. The bad news is that leading tax writers in the U.S. House
of Representatives appear to believe it’s their duty to further hamstring
the state corporate tax. Earlier this year, the House Judiciary Committee

Put another way, the BATSA legislation currently before Congress would
greatly increase the complexity of tax administration while providing
clear incentives for companies to “game the system” in an effort to avoid
paying any state corporate taxes on their income.

approved H.R. 1439, the so-called “Business Activity Tax Simplification
Act” (BATSA), which would make it substantially more difficult for
states to effectively tax the income earned by corporations from activities
within their borders.

Conclusion
The data in this report show in stark terms just how successful large,
multistate corporations have become at shirking their tax responsibilities

The bill’s sponsors—and the corporate lobbyists pushing this plan—
say that the goal of the bill is to limit state and local governments to
taxing only those businesses with a “physical presence” in a state. But this

to state and local governments. They have been abetted in this effort by
America’s major accounting firms, used heavy lobbying and even threats,
and often persuaded state elected officials to become their facilitators,

argument is misleading in two important ways.
But the report is as notable for what it does not tell us—and for what state
First, the “physical presence” standard may have made sense in an earlier
era, but doesn’t make any sense in the internet age. We all buy many

policymakers are simply not equipped to know—about how businesses
in each state are paying taxes.

goods and services from companies that do not have physical facilities
in our state, and these companies clearly benefit from the state and local
services that make these purchases possible.

State taxpayers can continue to tolerate this situation, or they can call
on their elected representatives to take steps to address it. This report
outlines some pathways to state corporate tax reform. If adopted, they

Second, even if physical presence were a sensible standard, the current
BATSA legislation’s definition of physical presence is so loophole-

would help restore state corporate income taxes as the progressive—
and popular— way to pay for needed state programs that they used to be.

ridden as to be meaningless. The bill has a variety of loopholes that allow
large corporations with lobbying clout to avoid state and local taxes
even though they have what any rational person would call a “physical
presence” in the jurisdiction. For example, under BATSA, a company that
sends a full-time worker into another state each day to install equipment
could be subject to that state’s taxes. But if the company simply created
two subsidiaries which each provided half of the equipment and which
each hired the worker to perform the installations, the state would not be
able to tax the business under BATSA.

Methodology:
This study represents an in-depth look at state (and local) corporate
income taxes over the 2008-10 period. It is based on data collected
for a November 2011study of federal corporate tax payments published
by Citizens for Tax Justice and the Institute on Taxation and Economic
Policy, titled Corporate Taxpayers and Corporate Tax Dodgers. That

if companies did not separate U.S. pretax profits from foreign, but foreign
profits were obviously small, we made our own geographic allocation,
based on a geographic breakdown of operating profits minus a prorated
share of any expenses not included therein (e.g., overhead or interest), or
we estimated foreign profits based on reported foreign taxes or reported
foreign revenues as a share of total worldwide profits.

report covered 280 large Fortune 500 corporations. This new state
corporate report includes the 265 companies of those 280 that fully
disclosed their state corporate income tax payments. Over the three-year
period, these 265 companies reported $1trillion in pretax U.S. profits,
and, on average, paid state taxes on about a third of that amount.

Where significant, we adjusted reported pretax profits for several items
to reduce distortions. In the second half of 2008, the U.S. financial system
imploded, taking our economy down with it. By the fourth quarter of
2008, no one knew for sure how the federal government’s financial rescue
plan would work. Many banks predicted big future loan losses, and took

1. Choosing the Companies:
Our report is based on corporate annual reports to shareholders and
the similar 10-K forms that corporations are required to file with the
Securities and Exchange Commission. We relied on electronic versions
of these reports from the companies’ web sites or from the SEC web site.

big book write-offs for these pessimistic estimates. Commodity prices
for things like oil and gas and metals plummeted, and many companies
that owned such assets booked “impairment charges” for their supposed
long-term decline in value. Companies that had acquired “goodwill”and
other “intangible assets” from mergers calculated the estimated future
returns on these assets, and if these were lower than their “carrying value”

As we pursued our analysis, we gradually eliminated companies from the
study based on two criteria: either (1) a company lost money in any one
of the three years; or (2) a company’s report did not provide sufficient

on their books, took big book “impairment charges.” All of these book
write-offs were non-cash and had no effect on either current income
taxes or a company’s cash flow.

information for us to accurately calculate its domestic profits, current
state income taxes, or both.

As it turned out, the financial rescue plan, supplemented by the best parts
of the economic stimulus program adopted in early 2009, succeeded in

averting the Depression that many economists had worried could have
happened. Commodity prices recovered, the stock market boomed, and
corporate profits zoomed upward. But in one of the oddities of book
accounting, the impairment charges could not be reversed.

do not apply to them.) We then determined a company’s current state
income taxes. Current taxes are those that a company is obligated to
pay during the year; they do not include taxes “deferred” due to various
“tax incentives.” Finally, we divided current taxes by pretax profits to
determine effective tax rates.similar change.
A. Issues in measuring profits. The pretax U.S. profits reported in
the study are generally as the companies disclosed them.1 In a few cases,

Here is how we dealt with these extraordinary noncash charges, plus
“restructuring charges,” that would profits were reported as foreign, even
We did have to leave out from the study companies whose geographic allocations were obviously ridiculous (e.g., almost all or even more than all of their
pretax profits were reported as foreign, even though most of their revenues and
assets were in the United States). Google and Microsoft are two examples of
such apparently “liar companies” that we left out of the study. For such companies, it may be that they reported in their annual reports how they misallocated
their profits on their tax returns, rather than where their profits were really
earned.

1

For multinational companies, we are at the mercy of companies accurately
allocating their pretax profits between U.S. and foreign in their annual reports.
Hardly anyone but us cares about this geographic book allocation, yet fortunately for us, it appears that the great majority of companies were reasonably
honest about it.
One company, Mattel, offered two versions of its geographic allocation of
profits. We used the more plausible one.

For better or worse, we did, with grave reservations, include some potential
“liar companies” that we highly suspect made a lot more in the U.S., and less
overseas, than they reported to their shareholders (e.g., Apple, Amgen, Gilead
Sciences, and EMC). We urge our readers to treat these companies’ true “effective U.S. income tax rates” as possibly much lower than what we reluctantly
report. We will be working more on this issue, and will report our findings in a
later study.

accounting, the impairment charges could not be reversed.

(b) Impairment charges to assets (tangible or intangible) that are
depreciable or amortizable on the books will affect future book income

but are instead reported separately (typically in companies’ cash-flow

plan for future spending (such as the cost of laying off employees over the

statements). We divided the tax benefits from stock options between

next few years) and will book a charge for the total expected cost in the

federal and state taxes based on the relative statutory tax rates (using a

year of the announcement. In cases where these restructuring charges

national average for the states).

were significant and distorted year-by-year income, we reallocated the
costs to year the money was actually spent (allocated geographically).

3. Negative tax rates.

2. “Impairments”

A “negative” effective tax rate means that a company enjoyed a tax rebate,

Companies that booked “impairment” charges typically went to great

usually obtained by carrying back excess tax deductions and/or credits

lengths to assure investors and stock analysts that these charges had

to an earlier year and receiving a tax refund check.

no real effect on the companies’ earnings. Some companies simply
excluded impairment charges from the geographic allocation of

4. Note: Companies do not provide information on their state income

their pretax income. For example, ConocoPhillips assigned its 2008

taxes on a state-by-state basis. As a result, the figures in our report show

pretax profits to three geographic areas, “United States,” “Foreign,” and

only the companies’ nationwide state income taxes.

“Goodwill impairment,” implying that the goodwill impairment charge,

Here is how we dealt with these extraordinary noncash charges, plus

if it had any real existence at all, was not related to anything on this planet.

“restructuring charges,” that would profits were reported as foreign, even

In addition, many analysts have criticized these non-cash impairment

though most of their otherwise distort annual reported book profits and

charges as misleading, and even “a charade.” Here is how we treated

effective tax rates:

“impairment charges”:
(a) Impairment charges for goodwill (and intangible assets with
indefinite lives) do not affect future book income, since they are not
amortizable over time. We added these charges back to reported profits,
allocating them geographically based on geographic information that
companies supplied, or as a last resort by geographic revenue shares.